Friday, December 17, 2010

Do home improvements benefit buyers OR sellers more?

Home owners willing and/or able to fix up before selling will find it interesting that making improvements on the exterior pays off more within the warm weather states.

Remodeling Magazine has released many of the results of its "Remodeling Cost vs. Value Report" and there is a lot be learned from it. Many home owners think that doing even a small remodeling or home improvement job will automatically increase the resale value. Not always the case.

The study shows only one project, which is exterior, actually brings a higher direct return upon the investment upon sale, and this is primarily within warm weather states. Only a "steel entry door replacement" shows better than a 100% recoup of cost upon sale, showing an estimated 102.1% "return" upon resale.

Exterior improvements made more of a difference in the "return" along the west coast (Washington, Oregon, California) and along the South and Southeast corridor extending north only to Virginia and West Virginia.

As with most statistics, there are a number of ways to look at the impact. Sellers who think that by spending $5,000 on a home improvement they could then raise the asking price by $7,500 or more are going to be in for a disappointment.

Among the next highest exterior remodeling projects were upsacle fiber cement siding replacement recouping approximately 80% of the cost. Upscale vinyl window replacements and a wood deck addition each showed an approximately 72% of costs recouped upon the sale of the home.

A "minor" kitchen remodel finished among interior remodeling or improvements at around 72% of cost.

In other words, this annual study again shows that an improvement or remodeling project does not automatically increase the actual value of the property. Rather, (and generally speaking) its purpose is to accelerate the sale process of the property.

If your house shows with more quality, upgrade, or improvement work done recently when compared with similar houses within your community, the chances are better that the one buyer you need will be more willing to make an offer on your home first.

Since the vast majority of buyers and sellers are not aware of this study, learning about its findings could be a nice benefit for either situation.

A buyer, when told of or noticing an interior or exterior improvement or remodeling now has the means to point out that it does not mean an automatic raise in the value of the property, and maybe shouldn't be (in effect) "charged" $10,000 more in the asking price based on a $5,000 remodeling job.

Meanwhile, a seller can use this to point out that he/she recently spent "$5,000 on this project" while not raising or having the asking price reflect this. Show potential buyers that if they do go ahead and purchase you are providing them with additional value for a feature the buyer obviously likes.

Please keep in mind that I have been using some lower than realistic figures for the sake of example. But there is a lot more at stake in upgrading a home for sale. The study shows that a full basement remodeling has an average cost of more than $64,000 and recoups approximately 70% within the sale. Going by that, the seller "loses" $19,200 on the project. Or, if the seller expects to not only have the costs covered and perhaps clear some extra, it really means their asking price could be $20,000 or more higher.

Furthermore, the study shows that improvement projects such as a sunroom addition and installation of a backup power generator recoup less than 50% of the cost at sale.

My take from this is that it shows why so many properties have an asking price above their actual value. I don't know of any seller who goes ahead with a remodel, addition, or interior or exterior improvement who then does not increase the asking price.

If I were a seller, I would point out any such work I had done and its value, and then show how it has not impacted the asking price. In addition, I would become aware of opportunities to upgrade the property to be able to point out to my buyer what he/she could do to increase the long term value of the property.

I might say something like "I learned that for $40,000 we could add another 200 square feet to a finished basement. But it's an option and by not doing that I can keep this home priced at $xxx,000 for you." If my potential buyer does not know about this study, they will probably think that they could spend that $40,000 at their convenience over the coming months and then add at least $60,000 to the resale value. Maybe or maybe not. But I would not have mislead them in any way nor promised anything. Just pointing out future potential "profit centers" they may want to explore.

For those of you currently or looking at trying to sell, this study is worth thinking about before seriously considering spending on an upgrade, addition, or remodel. On one hand, it could mean you can present a more significant value to a potential buyer without spending a penny more. On the other hand, it could be worth comparing improvements you could make and how your home would compare to other similar properties in the area. If your situation allows you to "lose" a few thousand dollars to have the work done, but would help your home to sell faster by offering more benefits, it is also worth considering.

These are the statistics you should be reviewing, instead of the home sales comparisons (which are usually negative) from past years. All you care about is buying or selling the property today.

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